No DOCSIS For Com21

7/27/2003 8:00 PM Eastern

By: Karen Brown

In many ways, Com21 Inc. hopes to go back to the beginning. Facing a large debt load and dwindling prospects for Data Over Cable Service Interface Specification products, the longtime cable data-gear vendor is jettisoning that business as it enters Chapter 11 bankruptcy.

If creditors and a U.S. bankruptcy court judge approve, the company will re-emerge as a video technology start-up, developing systems aimed at the burgeoning digital television and video-on-demand markets.

It's the latest turn of events for the beleaguered Milpitas, Calif., company, which for more than a year has struggled to climb out of a $30 million debt hole that opened when the so-called new Internet economy went bust.

"Com21 made some very aggressive growth decisions, and unfortunately the market went the other way shortly thereafter," Com21 CEO George Merrick said.

The company's direction changed in May, when it inked an original-equipment manufacturing deal with Arris Group Inc. The arrangement allowed Arris to rebrand and sell Com21's DOXcontroller 1000XB cable-modem termination system.

It didn't take long for Arris to make an offer to buy the technology outright. And to ensure the assets would be lien-free, Com21 filed for Chapter 11 reorganization.

Arris sealed the pact last week to pick up the assets for a mere $2.8 million, pending bankruptcy-court approval.

About 45 Com21 employees will also move to Arris.

"In one sense, it is good that Arris saw the technology and I'm pleased that the technology will carry on," Merrick said. "It's a great CMTS and we've had fantastic success with it, and at least some share of the Com21 employees will find a good home. But unfortunately the downside of it is, a lot of employees will have to leave."

The bankruptcy does provide Com21 with an opportunity to change course. The pending reorganization plan, to be presented to creditors and the bankruptcy court in the next 30 days or so, will propose reforming the company around the digital-video headend technology it has been developing for the past year.

To that end, Com21 is working on a deal to sell off its cable-modem business to Taiwanese modem maker CastleNet Technology Inc., which also had become a Com21 product reseller.

"The [intellectual property] of DOCSIS is a pool kind of thing, so there is not really any IP to sell anybody. It's a little bit of know-how, and I believe some of our now ex-employees are going to join them," Merrick said. "There's no huge fanfare there, but that is sort of where the DOCSIS modem business is going to end up."

If the creditors and court approve, once the transactions and the reorganization are complete, Com21 will re-emerge as a small project team working on the video headend project.

Even if the plan is approved, there are still plenty of hurdles. Com21 must still gather funding to support the project, and there are video issues to complicate the development work, such as conditional access and set-top box strategies.

"But that's what we saw over a year ago when we started the video project," Merrick noted. "That was the opportunity we saw — the transition to digital and the need to basically outdo satellite and take advantage of all of this two-way plant upgrade that has happened over the last five to 10 years."

Com21 will also face challenges from several already-established video technology players. But Merrick pointed to Com21's existing relationship with MSOs as a counterbalance.

"I would almost expect we will have delays, given the uncontrolled nature of this," he said, referring to the added complications of the bankruptcy and reorganization. "But by the same token, we are still close to the operators.

"We still have a technical advisory board that is very well-entrenched in the cable industry. We are very close to [Cable Television Laboratories Inc.], so I would say we have a very good handle on what's going on. The talk is far ahead of the technology."

On the funding front, Com21 has seen some interest from potential investors for its video project, Merrick noted. With the debt issue resolved via Chapter 11, the hope is these investors will be more willing to come forward.

"We've overcome that in maybe absolutely the worst possible way, but going forward we won't have the burden of those liabilities around our neck and it does make it more attractive to find capital," Merrick said. "We will make some contact with some of the venture capitalists who were early investors in Com 21 — they are still friends of the company, and they still know what we are capable of doing."

That potential is also enough for Merrick to stick with the company through the transition.

"I'm enthusiastic about it; I believe there is a real opportunity there," he said. "It's definitely happening — this is not Com21 or me coming up with a plan that says, 'I'm going to invent this technology and then go see if anyone wants to buy it.'

"The plans are clear. There is going to be huge investment in video and VOD applications in the next few years."